How to Tell If You're Ready to Retire

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In 1980, 30% of all private-sector workers had a "defined benefit" retirement plan (a traditional pension) as their primary retirement plan, according to the Employee Benefit Research Institute. If you're thinking the current percentage is a bit lower than that, you're right. The Bureau of Labor Statistics reports that as of March 2017, while 48% of private establishments offered retirement plans to workers, only 8% offered defined benefit plans.

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In the old days, many workers could rely on their employers to provide them with sufficient retirement income. Today workers bear much more responsibility for their own retirements, and a key thing many need to be able to discern is how to tell when they're ready to retire.

Here are several critical questions that can help you determine whether you're ready to retire -- and what you might need to do to get ready.

Do you have a plan?

First off, do you have a plan? Unless you're independently wealthy and able to live within those ample means, you'll need one. Take a little time to figure out how much money you'll need in retirement. Make a detailed list of your expected monthly, annual, and occasional expenses, and throw in some more, for the unexpected. Be thorough, including housing expenses, insurance, taxes, food, transportation, healthcare, entertainment, and so on.

Know that Social Security is not likely to provide enough. On average, Social Security benefits are designed to only replace about 40% of your income -- with the percentage being higher if you had lower-than-average earnings and vice versa. So the average retiree will need to generate a significant amount of additional income. For context, the average monthly retirement benefit was recently $1,375, which amounts to $16,500 per year. If your earnings have been above average, though, you'll collect more than that -- up to the recent maximum monthly Social Security benefit for those retiring at their full retirement age, which was recently $2,687. (That's about $32,000 for the whole year.)

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The "4% rule" is a handy tool that can help you estimate your needs. It has you withdrawing 4% of your nest egg in your first year of retirement and then adjusting future withdrawals for inflation. This withdrawal strategy assumes a portfolio 60% in stocks and 40% in bonds, and it's designed to make your money last through 30 years of retirement. As an example, imagine that you've saved $400,000 by the time you retire. In your first year of retirement, you can withdraw 4%, or $16,000. In the following years, you'd adjust your withdrawals for inflation.

You can also flip the 4% rule around to see how much you'll have to accumulate in the first place. Imagine, for example, that you'd like to start retirement with total annual income of $60,000 and you expect to collect $25,000 from Social Security. That leaves $35,000 in income that you'll need to generate on your own. If you assume that $35,000 is 4% of your nest egg, then you can multiply $35,000 by 25 in order to arrive at how large your nest egg will need to be: $875,000. (Why 25? Because one divided by 0.04 is 25.)

How will you get the income you'll need in retirement?

Once you have an idea of how much income you'll need, you have to figure out where it will come from. If you're among the lucky workers with an ample pension, great! That will provide a big chunk of your income. If not, see whether you can and want to create your own pension-like dependable income stream by buying an immediate annuity, as opposed to the more problematic variable or indexed annuity. You may be surprised at how much income you can buy through an annuity -- and the amounts you're offered should increase whenever interest rates rise, too. Here's the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the current economic environment:

Person/People

Cost

Monthly Income

Annual Income Equivalent

65-year-old man

$100,000

$530

$6,360

70-year-old man

$100,000

$607

$7,284

70-year-old woman

$100,000

$567

$6,804

65-year-old couple

$200,000

$901

$10,812

70-year-old couple

$200,000

$997

$11,964

75-year-old couple

$200,000

$1,144

$13,728

Dividend-paying stocks can be another great source of income. A portfolio with $400,000 invested in dividend payers and an average yield of 3% will generate $12,000 per year, with that sum likely to rise over time as the underlying companies increase their payouts.

How will you pay for healthcare?

Fail to factor healthcare expenses into your plan at your own peril. Yes, you'll be able to enroll in Medicare at age 65, but even with Medicare, you can still have substantial out-of-pocket expenses. Fidelity Investments has estimated that a 65-year-old couple retiring today will spend, on average, a total of $275,000 out of pocket on healthcare -- and long-term care can add another $130,000 to the total. That $275,000 is an average, of course -- meaning you might spend less, or more.

Are you debt-free or close to it?

Aim to enter retirement with little to no debt, if possible -- especially credit card debt, which can be particularly pernicious because of steep interest rates. But even a low-interest rate mortgage can add to your financial worries in retirement. Many people like to pay off their home loan before retiring, so that they don't have mortgage payments hanging over their heads. That's a fine idea, if you can swing it. It can even be smart to delay retiring for a year or so, while you at least rid yourself of high-interest rate debt.

Do you want to golf, garden, volunteer, or travel?

Finally, remember that retirement isn't just about financial matters -- it's also about enjoying yourself after many years in the workforce. Spend time thinking about how you'll enjoy yourself. Know that many retirees find themselves a little lost and restless and sometimes even lonely and a bit down after retiring, as they may not have realized how much they depended on a structured schedule and regular socializing at work. Find ways to keep yourself active and socializing and busy while retired.

Retirement can be a tough and stressful time or a relaxed and enjoyable time -- and much of that depends on how well you've planned for your golden days. Know that a lot is under your control. By saving aggressively, for example, and perhaps employing some savvy Social Security strategies, you can boost your future financial security.

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